House Backs Variable Rate Student Loans

PHILIP ELLIOTT | Associated Press

WASHINGTON (AP) – Dismissing a veto threat from President Barack Obama, lawmakers in the Republican-led House approved legislation that links student loan rates to the ups and downs of the financial markets.

The Republican-backed bill would allow students to dodge a scheduled rate hike for students with new subsidized Stafford loans next month, but rates could rise in coming years. Democrats largely opposed the measure – which they branded the "Making College More Expensive Act" – while the Republican chairman of the Education Committee labeled the legislation a starting point for negotiations with the Senate and White House.

"The American people sent us here to tackle tough issues, not kick the can down the road. The time to act is now. Students, families and taxpayers cannot afford further delay," House Education and the Workforce Committee Chairman John Kline said after the vote.

Interest rates on new subsidized Stafford loans are set to double, from 3.4 percent to 6.8 percent, on July 1. Lawmakers from both parties say they want to avoid the increase but were divided on how.

Some Democrats are seeking a two-year extension of the current rates until Congress takes up a higher education bill later. Republicans have rejected that proposal – expected to cost taxpayers $9 billion – as costly and irresponsible.

Students, meanwhile, said they were left paying whatever rates were prescribed by Congress.

"We're caught in a bind that a college degree just isn't enough," said Ron Burruss, who will be a junior at Kentucky's University of Louisville in the autumn. "You're going to be forced to take those rates, regardless. There really isn't a choice nowadays."

Burruss shrugged off the prospect of facing higher student loan payments that would take more time to pay off if the interest rates go up.

"It kind of goes without saying that you're going to be paying on your student loans for quite a while," he said.

Under the GOP proposal, student loans would be reset every year, pegged to 10-year Treasury notes with added percentage points. For instance, students who receive subsidized or unsubsidized Stafford student loans would pay the Treasury rate, plus 2.5 percentage points starting for loans issued after July 1.

Current subsidized Stafford loans are offered at a fixed 3.4 percent rate and unsubsidized Stafford loans are offered at 6.8 percent. The interest rate on loans to parents and graduate students is 7.9 percent.

Using Congressional Budget Office projections, the GOP plan would translate to a 5 percent interest rate on all Stafford loans in 2014, but the rate would climb to 7.7 percent for loans in 2023.

Stafford loan rates would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent ceiling under the GOP plan.

In his budget proposal, Obama included flexible rate student loan rates pegged to 10-year Treasury bills. The president did not limit interest rates but included a smaller added interest rate. His plan also expanded income-based repayment options and loan forgiveness.

The House proposal faces a steep climb in the Senate despite some similarities to the White House's offer.

The Democrat chairs the Senate education committee similarly criticized the House GOP and its bill.

"We are focused on making college more affordable while they seem focused on making it more expensive," said Sen. Tom Harkin, the Democratic chairman of the Senate Health, Education, Labor and Pensions Committee. "The bill they passed today fails the first test of any policy: do no harm. It's worse for students than if the rate doubles."

Students who max out their subsidized Stafford loans over four years would pay $8,331 in interest payments under the Republican bill, and $3,450 if rates were kept at 3.4 percent, according to the nonpartisan Congressional Research Services. If rates were allowed to double in July, that amount would be $7,284 over the typical 10-year window to repay the maximum $19,000.